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BDs Address Fiduciary Rule, Growth Challenges

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There was not a slowdown in news at major broker-dealers this summer. LPL Financial recently shared the names of the 20 mutual fund partners it is working with on its fiduciary-friendly platform.

The mutual-fund-only (or MFO) platform, which will be rolled out in early 2018, does not include fund behemoth Vanguard. Nor does bond shop Pimco make the list. (ETFs are not part of the new platform, but are sold via general brokerage and fee-based accounts.)

(Related: Investors Should Sit Tight When a Fund Changes Managers: Morningstar)

It does offer clients reduced fees, while advisors get standardized compensation. The no-load funds bring advisors upfront onboarding commissions of up to 3.5% and a “consistent” trail of up to 0.25%.

The onboarding charge is waived for investors who already hold assets in these funds; about 80% of client assets in mutual funds now on LPL’s brokerage platform are invested in these 20 fund families, according to a memo sent out to the IBD’s affiliated advisors in mid-July.

LPL also says investors can easily move between fund families, rather than sticking with the same one year after year. Plus, clients may get discounts based on the total amount of brokerage assets invested in MFO-eligible mutual funds. The IBD has also eliminated certain annual account and trading fees.

“With this platform, LPL is striving to preserve choice for investors while managing the evolving regulatory environment,” said Rob Pettman, head of Product and Platform Management, in a statement. “We will be delivering a price competitive solution with the benefit of free exchanges across participating fund companies to help our advisors differentiate their practices in the market and serve a broad range of investors.”

When LPL outlined plans for the MFO platform in August 2016, the IBD said it anticipated it would introduce it in the first quarter of 2017. When asked about the one-year delay, a spokesperson pointed to “uncertainty” related to the Department of Labor’s new fiduciary rule, which went into effect June 9, as a key factor; the platform also entailed changes to how funds are traded by the IBD and development efforts that included product vendors and sponsors.

The 20 fund companies expected to be available on the new platform in 2018 are: AB (formerly Alliance Bernstein), American Century Investments, American Funds, BlackRock, Columbia Threadneedle Investments, Delaware & Optimum Funds, Eaton Vance Investment Managers, Fidelity Investments (pending final approval), Franklin Templeton Investments, Goldman Sachs Asset Management, Invesco, J.P. Morgan Asset Management, John Hancock Investments, Legg Mason Global Asset Management, Lord Abbett, MFS Investment Management, New York Life MainStay Investments, OppenheimerFunds, Principal Global Investors and Putnam Investments.

“Goldman Sachs Asset Management is pleased to be working with LPL Financial on the development of its Mutual Fund Only brokerage platform, which will feature the GS Financial Square Government Money Market Fund as a vehicle to access the platform,” said Matt Hostasa, managing director of Goldman Sachs Asset Management, in a statement.

Surveys Say …

According to a study released in July by PriceMetrix, part of McKinsey & Co., advisors’ average assets under management improved 6% in 2016 from the prior year and hit $92 million. Revenue per advisor, or average fees and commissions, decreased for the second year in a row — dropping 1% to 583,000 in 2016.

“This trend is particularly disturbing in light of the strong equity market performance during that period,” said Patrick Kennedy, chief customer officer of PriceMetrix, in “The State of Retail Wealth Management.” Drilling down into the acquisition of new clients, the research finds that advisors reached “a new low” in 2016, with an average of only 7.5 new household relationships.

“There is very little growth in client relationships with Gen X and Gen Y. This is an early warning sign that advisors should pay attention to,” Kennedy explained in an interview.

“Some of these individuals are in their 50s and becoming attractive prospects,” he added. The issue for advisors, of course, is whether they can convert these prospects to clients.

The study found that advisors are growing their fee-based revenue, which now represents about 54% of their production — up from 49% a year earlier. However, the level of fees as a percentage of assets fell in 2016 to 1.13% from 1.16% in 2015.

“This decline follows several years of stability, and raises concerns that advisors may be succumbing to the price pressure from new wealth-management competitors, such as robo-advisors,” Kennedy said. The study tracks satisfaction tied to compensation, firm leadership, professional development, operations, client support, technology and problem resolution.

For new accounts, the news is worse. The fee ratio dropped to 1.07% in 2016 from 1.12% a year earlier. “Programs that encourage advisors to communicate their value to clients and defend commission and fee levels are essential,” he added.

As for advisors’ satisfaction with their BDs, this metric continues to decline, says the latest J.D. Power study of wealth managers. Most important, the study finds, the drop is sharpest among the highest producers.

“Among investors, the most affluent and profitable clients tend to be the most satisfied because they get more attention and value from their firm,” said Mike Foy, director of the wealth management practice at J.D. Power, in a statement. “With advisors, we see the exact opposite.”

Among advisors with more than $1 million in annual fees and commissions (or production), overall satisfaction is 683, down 27 points from 2016. In contrast, for advisors with less than $250,000 in production, overall satisfaction is 799, up 35 points from 764 in 2016.

“A confluence of factors, including continuing changes to compensation, uncertainty over the Department of Labor fiduciary rule, emerging technologies like robo-advisors and waning faith in firm leadership are all contributing to the trend,” the report explained.

Foy points out that four in 10 advisors do not have a complete understanding of how the rule affects their practice, while one in five has indicated that their BDs have not given them specific information on what the rule means in terms of account changes for their clients.

Overall satisfaction averages 719 among employee advisors, down three points from 722 in 2016. As for which firms stand out as “above average,” Edward Jones tops the list at 925, followed by Raymond James & Associates, Ameriprise and UBS.

“This is a tremendous vote of confidence during a period of intense industry change, and it validates the direction of our firm leadership, the essential role of our branch office administrators, and our compensation that fairly rewards individuals for their contributions to doing what’s in the best interest of our clients,” said Managing Partner Jim Weddle of Edward Jones in a statement.

Edward Jones adds that the J.D. Power study finds 90% of its reps say they are likely to be working at the firm over the next year or two versus the industry average of 51%.

Although J.D. Power does not publicize the independent-channel results, Commonwealth and some of its peers have “done very well” in the polls in recent years, said Commonwealth Financial CEO Wayne Bloom in an interview. “This is because we are advisor-centric and walk the walk.”

Other key findings from the report are:

  • DOL fiduciary rule spurs confusion: Among employee advisors, 41% indicate they don’t completely understand the fiduciary rule, but 64% say they expect to lose smaller clients as a result, and 58% say they expect it to negatively affect the profitability of their practices.

  • Additionally, 44% say the rule will make it more difficult to attract new clients, and 36% say it will be harder to retain existing clients.

  • Elevated high-touch support: Top-producing advisors have both greater needs and higher expectations in terms of technology and operational support than lower producers.

  • Top producers averaged 22 compliance contacts over the past year, compared with just 11 for lower producers, and also faced longer average resolution times.

  • Among advisors who indicate they spent more than 5% of time on compliance, overall satisfaction scores are 148 points lower than among those who spent less time resolving compliance issues.

Recruiting Revelations

HighTower Advisors says it is beefing up its managerial ranks to support an “aggressive growth strategy.” The RIA struck 21 deals in the first half of 2017, including its largest acquisition to date: the purchase of WealthTrust, which it announced in April.

Through June, the teams added have about $10 billion in client assets, giving HighTower a total of close to $50 billion, a 27% increase from Jan. 1. “In support of this rapid expansion and to help drive HighTower’s ongoing evolution, the firm is investing in top talent at the executive level, all reporting directly to CEO Elliot Weissbluth,” the company said.

The new hires are George Fischer, Susan Krakower and Kyle Okimoto. Fischer has been tapped to lead HighTower’s operations and service group; Krakower now serves as chief brand strategist; and Okimoto has been hired as a strategic consultant with a focus on supporting the company’s offering for independent business owners.

— Read Wells Fargo FiNet Adds 2 Merrill Teams in California: Recruiting Roundup on ThinkAdvisor.